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Chapter 6 - Developing and Implementing a Relationship Strategy

Throughout this book, the authors have focused on the creation of stakeholder value as the primary objective for a commercial organization. Trusting that message has been heard, the final chapter focuses on how to develop and implement a strategy based on this premise, and discuss topics related to this implementation.

Relationships as a Source of Value

Customers and other stakeholders seek to interact with a company in order to obtain something of value. They are also quite aware that they have ongoing needs, and will need to engage in a series of transactions over time, and seek to identify vendors who will serve them over a long period of time. Said another way, they are interested in relationships as a means to obtain value.

Unfortunately, firms have been slow to recognize this. They have traditionally been in a dominant position, providing goods to people who needed them and had no other means to serve their needs. As such, value has traditionally been consider in terms of the benefit that others give to the firm, rather than the value it must provide to them to earn their ongoing involvement - simply being there has been good enough for generations. Firms have also been focused on transaction, talking for granted that a first-time buyer will automatically repurchase, and they have also been focused on the customer and the investor to the exclusion of every other stakeholder.

All of this considered, companies must take a broader view of all the stakeholders that contribute to their success, must take a longer view of the duration during which they will be engaged, and must take a bilateral view in understanding that the value they provide to others determines the value others are willing to provide to them.

A framework for relationship value management

A rather convoluted diagram is presented, ripped from another source, with some explantio0n:

• There are four steps: value determination, value creation, value delivery, and value assessment.
• The six market domains are given: customer markets, referral markets internal markets, recruitment markets, influence markets, and alliance markets
• For each step and domain, key value activities are listed

A bit more information on the four steps is given:

• Value Determination - The value that the stakeholder seeks to achieve: customers seek to solve their needs with the product, employees and vendors seek to have a steady stream of income from serving the firm, regulators seek to improve their image with their constituents, etc.
• Value Creation - The activities that the firm undertakes to create the value sought by shareholders, and the degree to which their product or interaction provides value
• Value Delivery - The degree to which the firm facilitates the activities of the stakeholder in obtaining the value (a store convenient to shoppers, an office convenient to employees, etc.)
• Value Assessment - The degree to which the stakeholder feels that interacting with the firm has in fact delivered the values that were expected

Of importance is that this process defines value from the stakeholders' perspective. The value that a firm gets from a stakeholder in exchange is a secondary consideration - naturally the firm must get what it needs in order to sustain itself, and should be efficient in doing so, but it is a consequence and should not be the primary motivation. If the stakeholders' interests are not served, they will not choose to be in a relationship with the firm at all, making questions of efficiency moot.

From customer value to stakeholder value

The three key groups that create value for the organization are employees, customers, and shareholders - and it's suggested that employees should be given top priority because they have the greatest ability to influence the satisfaction of the other two groups, customers have second rank because they contribute value to the organization. This is, however, a general principle, without any clear indication of how much one variable must be improved to achieve a given level of improvement in another.

Choice of Relationship Strategy

The authors present a "contingency" approach to marketing strategy, which suggests a firm can focus on one of three areas:

1. Operational Excellence - Providing the market with the lowest-priced product
2. Product leadership - Providing the market with the most advanced product
3. Customer Intimacy - Providing the market with the product best suited to their needs

That is not to say that one is done to the exclusion of others, but it is generally pursued to the complete neglect of others - but when there is a conflict or limited resources, it becomes clear which approach is preferred.

The approach taken will strongly influence the internal culture of a firm and the way in which it interacts with stakeholders. For example, a firm that chooses "operational excellence" will develop a culture based on efficiency, and will seek to get as much as it can from stakeholders while giving them as little as possible in return. I will seek to partner with firms that enable it to increase operational efficiencies, and show little interest in those that will improve product quality or give them access to new markets.

Naturally, the authors prefer the "customer intimacy" approach, and suggest this kind of firm is responsive to the needs of the customer, and seeks to collaborate with other stakeholders to delivery greater value to the customer, rather than achieve efficiency or product sophistication, and in particular it seeks a close relationship to the customer.

Planning for the Six Markets

Marketing strategy remains based upon the "4P" model of marketing, which does not play well with relationship marketing. Relationship marketing would divide the goals according to the six markets before considering how to best achieve goals with each of the markets. Relationship marketing also requires a more collaborative approach, involving the members of the market directly in the panning process to ensure that the strategy is appropriately focused.

While there should be certain consistencies among the strategies for each market, there will also be differences. A firm cannot communicate opposing ideas to different markets, as the conflict will be exposed and the firm will seem disingenuous or unintelligent and the strategies will not in fact align. However, different things will appeal to different markets: customers and employees will be intensely interested in details about the quality of workmanship, but an external group of environmental activists will be completely indifferent to this.

The Relationship Management Chain

Traditional marketing strategy has also been myopic, focused entirely on what the firm is capable of doing for the customer, without considering the other participants in the value chain except to dismiss from planning any element the firm would prefer to be handled by someone else, so they do not have to worry about it. Considering that the customer's experience of a brand (not to mention the experience of employees, shareholders, and all other stakeholders) results from the activities of the entire chain, the work done by other firms cannot be ignored.

The Relationship Management Chain

The goal of relationship marketing is to deliver superior customer value on a continuing basis, which requires the management of four key elements:

• Defining the value proposition. Of importance, each customer defines the value he seeks to obtain - and when the producer indicates the values he intends to deliver, he must accept that he will be rejecting the business of customers who do not agree. As such, defining the proposition is a matter of asking questions: what do customers value?
• Identifying appropriate customer value segments. A company cannot be everything to everyone - so after considering what customers want, the firm must consider what it is capable of delivering, and accept that it will appeal only to certain segments of the market. Because serving one segment means failing to serve another, the firm should consider this a trade-off analysis to ensure it is seeking the most profitable segments that it has the capabilities to serve.
• Designing value delivery systems. The next step is to determine the means by which the firm can deliver the desired values to the desire customers. Certain tasks must be performed, some by the company and others by vendors/partners the firm will engage. The processes must be defined, and with sufficient flexibility.
• Managing and maintaining delivered satisfaction. After the systems are designed and put in place, the firm must manage their ongoing operations to ensure that the values are effectively and efficiently being delivered. It's particularly important to note that efficiency comes last - if the customer values are not delivered, efficiency is pointless ritual.

The steps above are described in terms of delivering value to the customer, which is the primary goal of any organization. It must apply the same steps to each of the stakeholders - but in a subordinate manner. Having good relations with stakeholders is only important if those relationships are supportive of the primary mission of serving customers.

Implementation and organizational issues

Recall that the present trend is to move away from companies that are vertically integrated and attempt to do, themselves, everything that must be done, and instead draw upon suppliers and partners to address other functions in the value chain. While the functions can be outsourced, this does not relieve the firm of its responsibility to ensure that they are still aligned with creating customer value.

The problem is not limited to vendors and partners, but is also evident in the organization's internal structures: when the shipping and manufacturing departments are being run as separate silos, it is just as detrimental as if they were entirely separate companies, and just as important to orchestrate their efforts.

For many organizations, this will require a significant cultural change, to get employees to focus on the customer's needs rather than their defined tasks, and collaborate across organizational boundaries. The skills and breadth of knowledge required to successfully support this philosophy are quite different to those found in a rigid bureaucracy.

The authors refer to the McKinsey "Seven S" framework for implementing changes necessary to a customer focused culture:

• Strategy - The starting point for implementing change
• Structure - The way the organization is arranged into departments and functions
• Systems - The methods by which the structures work and interact with one another
• Style - The traditions and customs surrounding the interactions
• Staff - The number and types of personnel that constitute the organization
• Skills - The capabilities and competencies of the personnel and the organization as a while
• Shared Values - An interconnecting structure that defines the beliefs and values of an organization, which must be supported by the other six

There are a number of potential obstacles to this transition, not least the entrenched interest in preserving the status quo.

A general statement: "The changes involved in making the transition to relationship marketing management are clearly profound." Moreover, there are many obstacles to the transition, both functional difficulties and the desire to preserve the status quo.

Organizational Change

A shift of this nature cannot be contained within a department, but must be organization-wide and beyond, reaching out to other companies. As such it requires the support of senior management to align the entire firm to relationship management. It is also impractical to attempt to effect such a significant change all at once, but instead the authors suggest defining a number of steps that can be taken to make the change in logical increments.

Relationship marketing is a bilateral relationship between people and processes, and as such cannot be forced upon an organization. It depends of cooperation rather than compulsion, and influence rather than formal authority, which requires more time.

A slow approach enables the project to demonstrate success, and success generates enthusiasm for adoption. In the early stages, there must be latitude and patience - the first attempt may not succeed, nor will it succeed overnight, and it definitely will fail if its failure to create an immediate and significant impact leads the plan to be abandoned.

One suggestion: implement a pilot program, to which the organization is willing to commit for a sufficient period of time. For example, a project to improve supply relationships or improve talent recruiting can demonstrate on a small-scale the benefits of a relationship approach.

When a company is running sufficiently well, there is little interest in changing - but where a crisis exists, there is opportunity for rapid change. It might be possible to make faster progress, encounter less resistance, and more quickly gain support, if a relationship approach can be applied to solve a problem that is perceived to be severe.

In general, a change starts with a small number of people who are committed to an idea, and who have support from within the organization to make a change. They involve a "vanguard group" of supporters who may be less enthusiastic but willing to support the cause - ideally, these are individuals who are visible and influential, and can help to spread the word.

Another recommendation: start with small teams that work on internal issues. It should be possible for a team of three to five people to institute a change of modest scope. This team should be cross-disciplinary and exist outside the bureaucratic structure of the organization to maintain its independence and integrity. If it does not belong to a given group, it is not constrained to a specific agenda, and is not seen as a threat.

Five Specific Challenges

The authors present five specific "traps" or "paradoxes" that should be considered when implementing a change.

One: employees happily obey orders

The notion of an employee as a mindless servant who follows orders without question is an anachronism that may never have existed. They may wish to appear compliant to avoid the wrath of their supervisors, but they are resistant to change that is mandated from the top when they do not understand it and feel no sense of having buy-in. They will go through the motions, all the while hoping that the new plan fails, and even finding opportunities to help ensure that it fails.

Employees need to be informed of the reasons for the change. Early efforts should seek to gain the participation of those who are eager to voluntarily adopt the change, and when success can be demonstrated (not merely described), it will become easier to overcome resistance.

Two: training must be adequate but not excessive

Employees do not automatically change from old processes to new - and even those who are eager to adopt a new idea need to learn how to do so. It also requires more training to teach people to do something new than it does to reinforce existing behavior.

On the other hand, investment in training is wasted if too much training is provided for too many people too soon - it must be given when it is needed, rather than so early it is forgotten by the time it is needed.

The authors also mention concepts of knowledge management and the learning organization - which failed miserably in the years since the book was written, largely because firms attempted to implement processes and solutions in organizations who did not have the appropriate culture.

Three: culture can be easily managed

Corporate cultures reflect the values and beliefs that are deeply held and are not subject to fast changes. Changing the marketing slogans and coming up with a new logo does not change the culture at all, and seems rather silly to the employees, who will play along to please management.

Corporate cultures do change, but they are not "talked into" changing. The company must have a strategic intent, and the values must be married to actions in order to be meaningful. Even at tat, a culture change takes a long period of time.

Four: everybody should be involved

An enterprise-level change cannot be rolled out everywhere at once. Staff are generally involved in patterns and routines that they believe to be important and productive, and which have achieved what they regard to be success through months and years of repetition. They are not willing, even if they were able, to change everything they do all at once and embrace new, unfamiliar, and uncomfortable routines.

For this reason, starting small is the better approach. Build a small number of evangelists for the new way, and let them demonstrate their success to others. Broaden the base slowly over time until it has spread throughout the organization.

Five: success is in the numbers

Financial accounts very rarely reveal much about the activities that costs are based around - and in many instances a new initiative bears a great deal of cost in its implementation and the early years and employees work more slowly and inefficiently while they are learning new routines. All of this makes innovation seem expensive and ineffective, and provides a great excuse to smother it in the cradle.

It is important for an initiative to have a positive financial impact on an organization: but it is likewise important to compare its performance against its stated goals, and goals that account for the inefficiency of the early stages of adoption, rather than insisting on immediate bottom-line impact.

This is especially true of a change from transactional to relationship management: the latter is not about maximizing immediate profit, but maximizing product over a long period of time - it is like measuring the performance of a marathon runner by considering the first mile as if it were a sprint.

Generating Knowledge through Dialogue

In relationship management, two-way communication is critical. The firm is no longer working in a vacuum and expecting the market to accept whatever it offers, but is listening to the market to learn what it can offer that will be accepted. In such a situation, the knowledge that leads to success is not contained within the firm - it is out there in the market.

Traditionally, marketing has been in broadcast mode: using the mass media to communicate messages to the customers, while only rarely conducting research to allow the market to communicate to the firm. In relationship marketing, much greater effort must be placed in soliciting input.

The nature of dialogue

Dialog, as opposed to one-way communication, requires not only listening, but attempting to understand the other party. There are many verbal; and nonverbal conventions that a listener can use to confirm that he understands correctly, or to signal the speaker that his message is not being received and understood. Even a listener who doesn't say a word is interacting and communicating back to a speaker.

A successful relationship requires that the parties involved learn from one another in order to sustain and improve value exchanges between them - and to do so, they must learn from one another through an ongoing dialogue.

There's also an oblique mention that dialogue is not merely the exchange of information, but an exchange of trust. Dialogue is a means of agreeing on the terms of a transaction, and the satisfaction will be strongly influenced - for better or for worse - which will impact the trust that is brought into the next encounter.

Internal marketing as dialogue

There is a notion of the employee as an "internal customer" or the organization, with whom a dialogue must be maintained to sustain that relationship as well. The firm has much greater opportunity to engage in this dialogue, as it has more frequent contact with employees, and more ability to strike up a casual conversation. However, as with external customers, firms have generally been one-sided in their communication with internal customers, and speak far more than they listen.

A few approaches are described for communicating with the internal audiences:

• Internal customer approach. The methods of communicating to and soliciting information from the external market can be applied to communicating with employees and partners. Ideally, it should be more bilateral than the traditional approach, but no less respectful.
• Supplier approach. Employees can be considered to be similar to suppliers. This approach considers the employee as a provider of labor and expertise to the firm, though may create contention as the employer will seek to strong-arm and haggle
• Networked approach. This approach considers employees to be collaborators with the firm who contribute to the creation of value for the firm's customers. It is a happy medium, in that the relationship is mutually respectful and takes on a tone of working cooperatively toward a common goal.

The Future of Relationship Marketing

The idea of relationship marketing has been receiving increased attention over the past decade or so, and it is not at all a new idea. Businesses recognize that their long-term success depends on building a corps of regular customers, and relationship marketing is implicit in doing so. As such it's an approach that has waxed and waned in popularity.

During the last few generations, when demand for products outstripped the ability to supply them, relationships became dispensable to business - by having control over supply, they have been in a position to dictate terms and could treat customers in a deplorable manner, assured they would come back for lack of another option to satisfy their needs.

This situation has ended: for most goods, the supply side is crowded, and the power has shifted to the buyers, who are able to choose among many sources, and they are now in a position to make demands. Fortunately, their demands are reasonable: provide a product that satisfies their needs.

And so, until the balance of power shifts back to the supplier, it is likely that firms will need to satisfy the demands of the customer - and to be familiar with what those needs are, and to stay abreast of changing needs and preferences, firms must seek to develop and sustain relationships.

The authors reflect on some of the key points in the book, and demonstrate their connection to trends in the market, essentially that customers seek not only transactional value, but the convenience of entering into an ongoing relationship with a supplier. Regardless of which way the power shifts in the market, it will be more efficient and effective for both seller and buyer to develop their relationship than to constantly undertake the effort to find replacements.

They further consider trends that are seen in business - the way that firms relate to their employees, to their suppliers, to their regulators, to the public, and to other stakeholders are all trending toward a relationship model - or at the very least are showing behaviors that suggest the values on which relationship marketing is based.

It is also more accurate to consider the move toward relationship marketing as an evolutionary trend rather than a "paradigm shift," a term that has been overused and misused of late. Largely, companies aren't changing to an entirely new and incompatible way of thinking about the way they do business, so much as they are adopting incremental changes and improvements because they are considering the firm as a whole, rather than as a collection of isolated and disjointed departments, as well as conspiring the value chain as a whole, rather than a collection of isolated and disjointed firms.

As a result, relationship marketing is not a drastic change to the way business is done, but has the potential to result in drastic improvements that can be achieved by managing activities at a higher level, finding opportunities to improve efficiency and effectiveness that are not apparent at a more granular level. It also seems unlikely that firms will revert to the old way of management and sacrifice the gains they will make.

There are also external factors that are expected to encourage relationship marketing. The Internet is one of the more striking examples, which provides a method for firms to communicate more efficiently with their markets and, more significantly, for the markets to communicate back to the firms in a way that has been impractical to impossible previously. As firms and their stakeholders become accustomed to communicating, it is likewise less likely they will sever this connection and revert to transactional interactions.

All of this considered, the authors feel confidence that relationship marketing is likely to continue to gain in popularity - it is certainly in a growth cycle, and it seems highly unlikely that it will disappear or fade to its former status.

Summary and Conclusion

Developing and implementing a relationship strategy with multiple stakeholders is the main theme of this book, and a secondary theme has been that it is not something that can be done by one department, but will require the involvement of the entire organization - and beyond, reaching out to stakeholders who are not traditionally considered part of the firm, proper.

While these themes relate to an expansion in scope, there is also a necessary narrowing in scope: a firm cannot and should not seek to form intense relationships with all its stakeholders - there just are not sufficient resources to do so - nor do all stakeholders necessarily wish to be in a close relationship to the firm. To be successful at building relationships requires being selective in the relationships you choose to build.

Ideas about relationship marketing are still evolving, though they point to the convergence and integration of the chain or network of organizations that collaborate to create customer value. The character of the organizations and the relationships between them is in flux.

An area of particular weakness is metrics: measurements of the success of the firm as a self-contained entity and measurements of sales as a one-time transaction are very well established. Measuring the degree to which a firm creates and receives value from its relationships with stakeholders over a longer period of time remains elusive, and may be one of the most important areas for future research, as metrics drive actions.